Reinvesting Into a Second Project: A Worked Example of Recycling Equity

An illustrative SAR calculation of how much of a first project return is really available for a second, and why sizing the next scheme to the cash matters.

After a first project, the temptation is to size the second one against the gross figure that came back. This worked example separates returned equity from profit, deducts the costs of exiting, holds a reserve, and then sizes the second project to the cash that is genuinely available. All figures are illustrative assumptions.

The situation

Your first Saudi development has completed and sold. You invested SAR 12,000,000 of equity and made a profit, and you now want to commit to a second project with the same partner. The question is how large the second scheme can be without leaving you unable to fund an overrun.

Assumptions (illustrative)

• Equity returned from the first project SAR 12,000,000, plus profit of SAR 2,700,000.
• Costs of exiting the first project, including agency, legal and closing costs, assumed at SAR 400,000.
• The second project is proposed at a total development cost of SAR 40,000,000.
• Funding assumption for the second project: 40 per cent equity and 60 per cent debt.
• Target return on the second project assumed at 18 per cent on total development cost over 30 months.
• You want to hold SAR 1,500,000 aside as a reserve outside the project.

Step 1: Work out the cash actually available

Returned equity SAR 12,000,000 plus profit SAR 2,700,000 is SAR 14,700,000, less exit costs of SAR 400,000, leaving SAR 14,300,000.

The figure to plan with is what reaches your account, not the profit headline. Tax treatment depends on your structure and should be confirmed with a licensed adviser, and it may reduce this figure further.

Step 2: Size the equity the proposed project needs

At 40 per cent equity on a SAR 40,000,000 project, the equity requirement is SAR 16,000,000. Against SAR 14,300,000 available, the shortfall is SAR 1,700,000.

The proposed project is beyond your current capacity by about 11 per cent of the equity required. That is the moment to choose deliberately rather than to assume it will resolve itself during delivery.

Step 3: Compare the ways to close the gap

Either bring a partner for SAR 1,700,000, which is about 10.6 per cent of the SAR 16,000,000 equity, or reduce the project so that SAR 14,300,000 is 40 per cent of cost, giving a total cost of SAR 35,750,000.

Both options are legitimate. Diluting brings a co-investor into the decisions, while scaling down keeps control. What is not legitimate is starting a SAR 40,000,000 project hoping the gap closes later.

Step 4: Hold the reserve outside the project

Setting aside SAR 1,500,000 leaves SAR 12,800,000 of equity. At 40 per cent, that supports a project with a total development cost of SAR 32,000,000.

The reserve is the difference between managing an overrun and being forced to accept whatever terms are available when you need money urgently. It costs you project size, and it buys you negotiating position.

Step 5: Check the return on the smaller project

At 18 per cent on cost, a SAR 32,000,000 project produces profit of SAR 5,760,000. On equity of SAR 12,800,000 that is 45 per cent over 30 months, which is about 18 per cent per year.

The smaller project with a reserve still produces a strong equity return. Growth in project size is not the only route to a better outcome, and it is the route with the least protection.

Step 6: Test the reserve against a realistic overrun

An 8 per cent overrun on a SAR 40,000,000 project is SAR 3,200,000, which you could not fund with no reserve. The same percentage overrun on a SAR 32,000,000 project is SAR 2,560,000, still SAR 1,060,000 more than the reserve of SAR 1,500,000.

Even the cautious version is exposed to a serious overrun, which is why the contract protections and the contingency inside the budget matter as much as the reserve outside it.

What changes the answer

• If the lender requires 45 per cent equity rather than 40, the same cash supports a project of about SAR 28,400,000 after the reserve.
• If tax treatment on the first project reduces the available cash, every figure in this example moves down proportionally.
• If the second project takes 36 months rather than 30, the annualised equity return falls even with the same profit.
• If the partner contributes cash rather than land, your share of both risk and profit changes and should be recalculated.
• If you keep one asset from the first project instead of selling it, less cash is recycled but you retain income.

What the numbers tell you

• Plan from cash received after exit costs and tax treatment, not from the profit headline.
• Size the next project to the equity you actually have, including a reserve held outside it.
• Closing an equity gap by dilution or by scaling down are both valid; hoping is not.
• A smaller project with a reserve can produce a similar equity return with much less risk.
• Test any reserve against a realistic percentage overrun, because reserves are usually smaller than they feel.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira designs, builds and manages projects across Saudi Arabia for owners who are based abroad: land appraisal, feasibility, design, construction, handover and asset management under one accountable contract. Send us the plot or the brief and Domira will put the numbers in front of you before you commit.